Lump-Sum Investing vs Cost Averaging

You just received a large sum of money (e.g., an inheritance or bonus) and you want to invest it. Should you invest it all at once or break it up and put a little in the market each month over a period of time?

This is a very common question.

Let's look at the findings from a Vanguard research paper entitled Cost averaging: Invest now or temporarily hold your cash?

The two methods will be abbreviated as follows:

LS = lump-sum investing

CA = cost averaging (often called dollar cost averaging)

Summary of Findings

• LS outperformed CA 68% of the time measured after one year.

• The longer the CA horizon, the greater the opportunity costs incurred and the greater LS's performance advantage over CA.

• LS in most cases yielded greater wealth after one year, but also greater losses in some of the worst market environments.

• Investors with significant loss aversion may be better suited for a CA strategy.

• Even if you're an investor with high loss aversion, it's best to minimize opportunity costs by keeping a relatively short CA period, such as three months.

• A CA strategy is superior to remaining entirely in cash.